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A recent essay published in JAMA recounts the competing pulls physicians must reconcile while practicing with one foot in the fee-for-service world, and the other in the value-based, accountable care world. The piece, by Ishani Ganguli, MD, MPH, and Timothy G. Ferris, MD, MPH, does a great job of conveying the conflicting financial incentives and seemingly contradictory processes physicians attempting to bridge the gap between both of these worlds regularly face.

They point out that value-based care models (which intend to reward better patient outcomes and lower spending) are beginning to proliferate the healthcare landscape. Yet fee-for-service purchasing (in which each episode of a patient visit, surgical procedure, hospital stay, etc. has its own individual fee) still remains dominant. In this way, the new game is beginning before the old game has ended. This reality commonly leads to temptation among providers and managers to merely incrementally tweak the existing business in efforts to accommodate the change in payment. But, by attempting to bridge both worlds, are providers actually creating one-size-fits-none models that leave no party better off?

When change from within isn’t enough

Attempting to innovate within the existing business model is only appropriate in cases when sustaining and/or incremental innovations, like a process improvement or upgrade in equipment, are the intended result. In cases of more comprehensive and fundamental changes initiatives, like the shift to value-based care, such a strategy is grossly ineffective. It’s left caregivers to pick up the slack and bridge the gap between the diverging models. It’s also resulted in lower margins for practices, along with greater complexity and increasingly burdensome administrative tasks referred to in the article by Dr. Ganguli and Dr. Ferris.

Instead, fundamental change initiatives like this one require an autonomous business unit—separate from the influence of the existing business—to foster growth and success, as outlined in The Innovator’s Solution by Clayton Christensen and Michael Raynor. Autonomous units are needed when the organization’s current processes aren’t appropriate for the new project, and/or the organization’s values are not likely to adequately prioritize the new initiative.

The necessity for this distinction stems from a general law of organizational nature. The business’ existing management will either starve the new model of necessary resources or force the new model to conform with the existing processes and values—resulting in mere incremental change and/or failure.

The pull of the existing business model

An example of this strong force to conform, as described in The Innovator’s Solution, is F.W. Woolworth, then one of the world’s leading retailers, and their establishment of Woolco in 1962. Woolco was Woolworth’s response to the rise of discount retail stores, in essence, a discount department store arm of their own. It was, in fact, originally established as a free-standing, autonomously managed business unit, and like other discount retailers of the time, averaged gross margins of 23 percent and turned inventory five times a year, compared to the 35 percent margins and 3.4 turns per year Woolworth averaged.

But, in 1971, Woolworth corporate executives decided to integrate Woolco back into Woolworth in attempts to leverage the fixed costs of management, buying, and logistics functions across both businesses. What came of this integration? Within the span of a year, Woolco’s margins were pushed up to 34 percent, and their inventory turns declined to four times annually—mirroring the profit model of F.W. Woolworth, and resulting in Woolco’s ultimate closure.

For Woolco to make it as a discount retailer, they needed to remain a separate business unit, as their values and processes were too different from those of Woolworth. Likewise, this pull of processes and values within the existing business has resulted in the failure of new growth ventures in many industries, being the scourge of innovation efforts from companies the likes of Bank One, Charles Schwab, Merrill Lynch, and IBM.

What does this mean for providers?

For many providers, the switch to delivering care within a value-based system requires a fundamental change in processes and values. As such, the change initiative should ideally be housed in a separate and autonomous business unit, just as Woolworth originally did with Woolco.

Such a prescription is easier said than done. Smaller practices and specialist practices may be particularly reluctant to go “all in” on value-based care with an autonomous unit, as they have historically been dependent upon fee-for-service arrangements. More so than others, they may be tempted to hold onto their fee-for-service model and do the bare minimum to accommodate for value-based care within their existing model. Careful assessment of their situation is likely to reveal that their transition to value-based care will entail more drastic change and warrant an autonomous business unit. If not assessed and acted upon properly, reinvention efforts, necessary for future success, will only result in further frustration and one-size-fits-none solutions.

As a Research Associate, Ryan investigates potentially disruptive healthcare delivery models and the technologies that will enable their success. He is particularly interested in health information technology and is currently researching Disruptive Innovation in the space of electronic health records.

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